The Antitrust Economics of Tying: A Farewell to per Se Illegality

• Author: David S. Evans,A. Jorge Padilla,Christian Ahlborn
• DOI: 10.1177/0003603X0404900108
• Date: 01 March 2004
• Published date: 01 March 2004
• Subject Matter: Antitrust in the U.S. and the EU: Converging or Diverging Paths?

The Antitrust Bulletin/Spring-Summer 2004

The antitrust economics

of

tying:

afarewell to per se illegality

BY CHRISTIAN AHLBORN,* DAVID S. EVANS**

and A. JORGE PADILLA***

I.

Introduction

287

Tying exists when the seller of a product requires his purchasers to

take another product as well. The most robust statement one can make

about tying is that it is ubiquitous. Consider the following examples:

shoes are sold in pairs; hotels sometimes offer breakfast, lunch or

dinner tied with the room; there is no such a thing as an unbundled

car; and no self-respecting French restaurant would allow its patrons

to drink a bottle

of

wine not coming from its cellar. In a certain sense,

as Robert H. Bork noted in his famous book,

Every person who sells anything imposes a tying arrangement. This is

true because every product or service could be broken down into

*Competition lawyer with Linklaters.

** Economist with NERA Economic Consulting.

*** Economist with NERA Economic Consulting.

AUTHORS' NOTE: We have benefited from the comments and suggestions

of

Bill Allan, Robert Hahn, Alberto Heimler, William Kolasky, Gunnar

Niels, Michael Salinger, Valerie Rabassa and Adriaan ten Kate. We are

grateful to Microsoft

for

financial support

of

our research. Please e-mail

comments

to: C

hristian.Ahlborn

@linklaters.com;

David.

Evans

@nera.com; and Jorge.Padilla@nera.com.

© 2004 by Federal Legal Publications. Inc.

288 The antitrust bulletin

smaller components capable of being sold separately, and every seller

refuses at some point to break the product down any further

....

1

The other robust statement about tying is that it typically involves

both costs and benefits. Tying may result in lower production costs. It

may also reduce transaction and information costs for consumers and

provide

them

with

increased

convenience

and

variety.

The

pervasiveness of tying in the economy shows that it is generally

beneficial-it

could not survive in competitive markets

if

it were not.

Tying may also cause harm. This could happen when the tying firm

enjoys

monopoly

power

and

tying

leads

to

the

exclusion

of

competitors; it could not happen when the tying firm lacks significant

market power.

For a long period of time, competition laws on both sides of the

Atlantic failed to recognize that tying involves costs and benefits.

They

have

taken

a

hostile

approach

towards

tying

under

the

assumption that "tying agreements serve hardly any purpose beyond

the suppression of competition.'? With the United States Supreme

Court's decision in Jefferson Parish in 1984, however, the United

States law on tying adopted amodified per se illegality rule that

recognizes

the

welfare enhancing effects

of

tying." In its 2001

decision in Microsoft Ill, the D.C. Circuit Court of Appeals, to take

the efficiency effects of tying into account, adopted a rule of reason

approach to the analysis of tying cases with respect to computer

software

platforms."

European

Community

(EC)

law

has

not

ROBERT H.

BORK,

THE

ANrrrRUST

PARADOX

378-79 (1978).

Standard Oil Co. of California et al. v. United States, 337 U.S.

293,305

(1949).

Jefferson Parish Hospital Dist.

No.2

et al. v. Hyde, 466 U.S. 2

(1984).

4United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)

[hereinafter Microsoft III]. The appeals court had heard two previous and

somewhat related cases. United States v. Microsoft Corp., 159 F.R.D. 318

(D.D.C. 1995), rev'd, 56 F.3d 1448 (D.C. Cir. 1995) [hereinafter Microsoft

I]

resulted in a consent decree, in which Microsoft agreed to end certain

volume discounting practices and not to tie the sales of other products to

Windows. In United States v. Microsoft Corp., 980 F. Supp. 537 (D.D.C.

Tying:

289

experienced a similar movement to a recognition that even fmns with

market power may enter into tying without harming and possibly

benefiting consumers."

In this article, we show that modem economic thinking supports a

rule of reason approach toward tying. The argument is as follows: (1)

Tying is so common in competitive markets that it must provide

efficiencies; economic theory identifies many possible sources of these

efficiencies. (2) The economic literature finds that tying may have

anticompetitive effects (putting possible efficiencies to one side) when

certain necessary conditions hold; market power is just one of those

necessary conditions. (3) No economic theory finds that market power

(or

dominance)

is a

sufficient

condition

for

tying

to

have

anticompetitive effects; nor does any economic theory fmd that market

power and the absence of separate demand are sufficient conditions for

tying to have anticompetitive effects (the Jefferson Parish test). (4)

One must conduct a factual analysis to determine whether tying has

anticompetitive effects-economic theory by itself only says that tying

might be anticompetitive (in the same sense that owning a knife might

enable one to engage in lethal actions). (5) One must also conduct a

factual

analysis

to determine whether tying has procompetitive

effects-again

economic theory by itself only says that tying might be

efficient; however the pervasiveness of tying in competitive markets

provides considerable support to the existence of these efficiencies

generally. (6) A rule of reason analysis is the appropriate framework

for conducting the factual analysis described in points (4) and (5).

1997), rev'd, 147 F.3d 935 (D.C. Cir. 1998) [hereinafter Microsoft

Il],

the D.C. Circuit Court of Appeals found that Microsoft had not violated

the consent decree because it was held that Windows was an integrated

product of which Internet Explorer was a part.

Especially

for

multinationals

the

legal

treatment

of

tying

is

important in these two jurisdictions. The U.S. accounted for 33%

of

global production in 2001 while the EU accounted for 25%. Percentages

are based on authors' calculations. World Bank, Total GDP 2001 (visited

Jan. 27,

2003)

http://www.woridbank.org/data/databytopic/GDP.pdf.

Many companies have to design products and conduct themselves under

the

more

restrictive

of

these

two

sets

of

laws

since

the

cost

of

customizing to products and business practices can be prohibitive.